Company stock in your 401(k)? What Retirement Investors Need to Know

Owning company stock in your employer-sponsored retirement plan is not necessarily a bad thing. Company stock can potentially help employees profit from a company’s success and even provide tax benefits. But holding company stock can present unique risks, particularly if the stock allocation represents a large percentage of your total retirement plan assets.

Let’s consider the case of Enron which, although occurring long ago, still raises some valid points. Enron filed for bankruptcy late in 2001 after struggling for months with mounting losses and debts–as well as questions about its accounting practices. At the time, it was the largest corporate bankruptcy in U.S. history. Because more than half of the assets in Enron’s retirement plan were invested in the firm’s stock, the result was devastating. As the share price sank, so did the balance in many employees’ retirement plan accounts. An estimated $1 billion was lost among about 15,000 accounts.

Additionally, the collapse of companies like Lehman Brothers in 2008 caught the attention of millions of American workers who have company stock in their retirement plan accounts. With their own futures in mind, they have started asking some important questions.

What Can I Do?

Following are some steps each of us can take to evaluate our own situation.

Know your plan—Brush up on the rules that govern your employer-sponsored retirement plan. Is company stock an investment option? Does your employer make matching contributions in the form of company stock? Are there rules governing management of the stock within your account? You can request a Summary Plan Description, which details the rules. Ask your employer to clarify any rules you don’t understand.

Consider your share of company stock—If you do own company stock through your employer-sponsored retirement plan, what percentage of your total assets does it represent? The ideal allocation for you will depend on your goals, time horizon and risk tolerance, factors you may want to review with a financial professional.

Review your overall investment strategy—Take a look at your strategy for investing through your company plan. How much do you contribute and what investment options are you using? If your employer already matches your contributions with company stock, you may not want to invest additional money in it.

You also might want to consider investments with holdings that differ from your company’s stock–a strategy called diversification. If your company stock is a growth stock, for example, you might want to think about a fund that invests in value stocks. Or if your company is a retail company, you might want to look for funds that invest in other industries and sectors that may perform differently. The benefit of diversifying is that if one investment declines in value, others can potentially increase in value and help offset potential losses.

Consider your other investments. Do you invest in an individual retirement account (IRA) or other retirement savings account? Does your spouse have a retirement plan of his or her own? It’s important to look at the investments in those vehicles and determine whether they complement your plan investments. If you can’t control the level of diversification in your own plan as much as you’d like, you may be able to enhance your level of diversification elsewhere.

Evaluate your options

While Enron and other company collapses have raised valid questions about owning company stock, you may still want to consider taking advantage of your plan. A matching contribution of company stock may be better than no matching contribution at all. Conduct a comprehensive review of your plan assets, your investment strategy and your investments outside of your plan. And given the important role these assets are likely to play in your financial future, be sure to consult a professional before taking action.

A little more about us:Compass Financial is an independent, fee-based financial advisory firm in West Des Moines, Iowa. The Compass Team helps individuals and families develop an inspiring vision of their financial future and a realistic strategy.

By listening closely to our clients’ true needs, wants, hopes, desires and dreams we are able to combine Wealth Management and broad Financial Planning customized to each individual situation. It’s our goal to assist you in developing a personalized financial road map. The results from the process should include confidence that comes from planning. As we all know, life happens, sometimes ambushing the best laid plans. Accepting a new reality and adapting the financial plan is work we have done many times for our clients.

We also offer Financial Check Up or Second Opinion Services to those who want to enhance the service they are already receiving. This should lead to a better understanding of your current plans and give added confidence to your existing advisor relationship.

Sometimes life’s biggest challenges come in the form of transitions, retirement, marriage, health issues, divorce, unexpected loss, or even college savings. Our team at Compass has experienced many of these life transitions, it’s our hope to come alongside you and your family. These defining moments of life provide opportunities to implement financial strategies that can have long lasting impact. The first step is always the most difficult, but can also be the most rewarding. Please Contact Us today to receive your free, no obligation, one hour initial consultation!